Value add in Africa: First steps in a long journey

Tanzania’s recent cashew crisis underscores the need for Africa’s commodity producers to add value at home. Export credit agency finance could be one solution to help Africa build an industrial base that is still restrained by weak local players and poor crop yields, writes Sarah Rundell.

Tanzania’s President John Magafuli’s orders to hike cashew prices to protect the country’s struggling farmers, backed up by a pledge to buy Tanzania’s entire 2018 crop when private buyers acting for processors in Vietnam and India refused to pay, underscores the enduring problem for so many of Africa’s commodity producers.

African farmers grow around 45% of the world’s cashew nuts, yet 90% of the continent’s crop is exported for processing overseas, denying the industry the opportunity to add value at home and increase Africa’s share of global trade. The Africa Cashew Alliance estimates that a 25% increase in raw cashew nut processing in Africa would generate more than US$100mn in household incomes in the sector. As it is, Tanzania’s farmers get rock bottom prices and the country imports its own nuts back after processing to meet buoyant domestic demand. It’s easy to sympathise with the Tanzanian government, but crop seizures and price hikes aren’t a long-term solution. This lies in developing a local processing industry to add value at home, rather than giving the cashews away to Vietnam and India.

“It’s like Africa is a donkey working for everybody. We produce what creates wealth, but we get next-to-nothing for it because we do not add value. If we continue to trade in commodities we will continue being marginal players rather than serious players in the global market,” says Benedict Oramah, president and chairman of the African Export Import Bank (Afreximbank).

Accessing the finance to add value at home is one of the biggest challenges for Africa’s agri-processors and mirrors the scarcity of trade finance for Africa’s SMEs. Most are shut out by international banks which have no appetite to lend to any projects below investment grade or offer the small parcels of capital needed to empower local industry. They also face a prohibitive cost of funds from local banks, which lack liquidity and favour fixed deposits over SME lending anyway. Although the number of local and regional banks financing value-add amongst their domestic client base – often under Afreximbank’s lead – is growing, many projects fail to get off the ground.

Witness how Nigeria still loses 45% of its abundant tomato harvest before it reaches domestic consumers because of a lack of finance to fund the most basic value-add like cold chain storage. “Nigeria spends the same amount as it costs in lost tomato production on importing tomato paste into the country,” says Larry Umunna, country director Nigeria at non-profit organisation Technoserve, currently involved in a YieldWise project funded by the Rockefeller Foundation to reduce post-harvest losses in the tomato value chain.

It’s a vicious circle, because adding value is a key way for firms to better access trade finance as it makes more sense from a lending point of view, explains Giles Hedley, investor relations manager at Barak Fund Management, whose funds include the Mikopo structured credit fund, providing longer-term credit to processing plants in metals and agriculture. “We had a borrower who had landed a very good tender and needed financing to expand. They approached every bank in South Africa and were turned away. They had been accessing short-term trade finance with us and eventually came to us for the longer-term loan too,” he says.

Banks’ reluctance to finance value-add is matched by investor apathy too, says Hedley. Despite growing demand for finance from Barak’s existing borrowers as they graduate from straight-forward trade finance and working capital solutions to longer-term finance for capex projects, investors aren’t keen. “The Mikopo fund is up and running and has a good track record, but investor inflows are slow. From a yield perspective it is attractive, but risk and unrest in Africa means tying up longer-term capital in the continent is risky.
It involves financing out to five years, but the sweet spot is about three years.”

Where Hedley does see more investor enthusiasm for value-add, however, is the environmental, social and governance (ESG) angle around local job creation and long-term sustainability. It’s a theme that also aligns with the UN’s sustainable development goals, another metric institutional investors increasingly try to integrate into their portfolios. “Investors want to talk to the impact side of an opportunity rather than just the financing and commercial side,” Hedley says.

The enduring problem of access to capital has prompted some experts to look at the value-add conundrum through a different lens. African factories and processors should exploit their comparative advantage of labour and recognise their comparative disadvantage of capital, says Afreximbank’s Oramah. Adding value to bauxite to produce aluminium requires heavy capital investment, he explains. Instead, Africa could continue to export bauxite and import aluminium ingots to press into sheets, a last mile of value-add requiring intensive labour.

Cotton is another example. Rather than ginning cotton into yarn, producers should invest in the end of the value chain and make garments. “You can export the cotton raw, import fabric and make garments. If you spend US$10mn in making garments, you will probably employ 1,000 workers, grow your exports and build more factories. In a capital-scarce economy, it may make sense to export the raw materials, import something back that requires labour-intensive activity to produce, then re-export,” Oramah explains.

The role of ECAS

Export credit agencies (ECAs) offer one way for Africa to access cheaper finance for big ticket industrialisation, whilst benefitting their own domestic exporters. Africa’s richest man, Aliko Dangote – also behind the continent’s value-adding pasta and flour factories – recently arranged US$4.5bn in debt financing, which included backing from commercial and development banks and ECAs, for a giant Nigerian oil refinery to reduce Nigeria’s dependence on imported petroleum.

In other examples, mining groups looking to take elements of their African projects off their balance sheet and push project development are contracting out to suppliers of heavy equipment and power generation particularly. It’s providing export opportunities backed by ECA finance, notes Mark Norris, partner at Sullivan & Worcester.

The UK’s ECA, UK Export Finance (UKEF), for one, is working with the country’s exporters on a range of opportunities in Africa’s agricultural sector, including the provision of machinery and vehicles, irrigation systems, post-harvest storage facilities and livestock welfare, says Adam Harris, its head of civil, infrastructure and energy.

ECAs may provide the machinery and services to develop Africa’s mines and farms, but their mandate to promote their own domestic exports doesn’t move the needle on developing Africa’s own manufacturing and local content base. However, this may soon change. Under OECD rules, ECAs can only finance 30% of the content for an Africa-based project from domestic African suppliers and service providers. Now pressure to change these rules is growing, says Chris Mitman, founder and head of agency finance at Investec Bank, who attended the OECD stakeholder meetings in Paris in November. “Local companies that might get involved in contracts can’t access significant ECA-backed funding. If the OECD rules can be changed and ECAs can support more local content for projects where they can source locally, it will be great for developing local sustainable business and industry.”

ECAs are also becoming more open to working with Africa’s local and regional banks, which are beginning to develop export finance expertise and an ability to tap ECA finance, says Mitman.

Historically, some ECAs have pushed back from working with African banks because of concerns around their credit ratings and their proximity to borrowers. “ECA see local and regional banks as valuable partners. The question now is whether local banks are well resourced enough to develop the opportunity.” Mitman adds that ECAs’ strict controls over the use and application of funds ensures a visibility that will also encourage international
lenders into African projects.

Local content woes

But putting new manufacturing equipment into African factories requires exporters to drill down on where they can sell their wares and local content providers to secure ECA support in a complicated process.

In the oil, gas and mining sectors, where local content refers to local companies taking ownership stakes in mines and oil fields as well as the value-add of refineries or petrochemical industries, the number of viable local companies able to supply local equipment or services is an issue.

A successful local procurement environment needs knowledge, tools and capital to grow, says Mukund Dhar, a partner at law firm White & Case. “Without an enabling environment, the risk is local players are unable to fully participate in projects, or are only able to supply at uncompetitive prices because they have to import services and goods to be able to re-supply procurers,” he says. Local content participation also depends on local firms accessing capital in the constrained local bank market. “It gets challenging when the local partner needs to fund their participation in the development of the project or of the resources, and can’t access the finance to do so.”

It means international investors may end up financially carrying local participants; worse still, a local participant’s share of the expenses gets funded by the international participant on the back of a costly loan that leaves the local player bereft of any dividend unless commodity prices double or expenses collapse. “It can result in meaningless or illusionary participation,” says Dhar, who also notes the importance of local currency funding for local participants.

International banks tend to lend in dollars or euros with significant foreign exchange exposure for the borrower. “Loans may carry low interest rates but soft costs in terms of currency exposure and minimum sizes of debt necessary can be crippling. More exposure to local currency could be a game changer,” Dhar explains.

Yet take-up of UKEF’s local currency financing for African buyers of UK exports has been slow, says Harris. In 2016, UKEF expanded the number of local currencies in which it could support buyer credit financings to include 15 African currencies. “Like all local currency borrowers, African borrowers have to weigh up managing forex risk on the one hand versus the interest rates they pay on the other. We are yet to close our first African currency transaction, but we hope that with greater awareness of UKEF’s offer more borrowers will want to explore this route,” he says.

Another worry for UK companies sourcing local content is the Bribery Act. “UK companies need adequate procedures to ensure that the person in the local country isn’t engaging in bribery and corruption because that becomes a strict liability offence,” says Norris, adding that the requirements of the Act are increasingly being imposed on contracting parties even if they are not a UK business.

It’s a similar story in the agricultural sector, where poor yields and feeble local production often struggle to support value-add in factories and processing plants, forcing the agri-processors that do exist to import their raw materials. “We still find in many of our countries that the competitiveness of the average farmer is questionable,” says Umunna.

He draws on yield data to illustrate his point. Nigeria produces 1.8 tonnes of corn per hectare, compared to Egypt, which produces 7.7 tonnes per ha. Rice yields in Nigeria vary from between 1.3 tonnes per ha to 2.2 tonnes per ha, compared to Egypt’s yields of 9.5 tonnes per ha. Such poor crop yields hit agricultural processors’ bottom line, who always look to source commodities cheaply, he explains. “Nigeria’s agricultural sector needs to improve production if it wants to be a major supplier to the processors.”

Encouragingly, companies such as Olam, Nestlé and Unilever, which has invested US$30mn in two tea processing sites in Rwanda, and Coca Cola, which opened a new value-add drinks factory in Nairobi in 2018, are starting to invest more in local production backed by ‘Build Africa’ and ‘Source Africa’ strategies.

But Umunna would like to see them do a lot more. “The multinationals argue that their actions are influenced by consumer demand, but they also have the power to influence demand with Made in Africa strategies. It’s like that Chinese proverb ‘a journey of a thousand miles begins with a single step’.”

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Types of Personal Data Held and its Use

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to fulfil our obligations to you;

to improve the efficiency, quality and design of our Sites and services;

to see which articles, features and services are most read and used

to track compliance with our terms and conditions of use, e.g. to ensure that you are acting within the scope of your user licence;

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to protect or comply with our legal rights and obligations; and

to enable our journalists to contact and interact with you online in connection with any content you may post to our Sites.

Please see paragraph 5 below for more information on cookies and similar technologies and a link to a page where you can turn them on or off.

3. Marketing

Some of your personal data collected under paragraphs 1 and 2 above may be used by us to contact you by e-mail, telephone and/or post for sending information or promotional material on our products and/or services and/or those of our other group companies. We give you the opportunity to opt-out of receiving marketing communications. Further detail can be found on the applicable Site and in the footer of each marketing communication sent by us, our group companies or service providers. See also “Consents and opt-outs” section below. We will not share your information with third parties for marketing purposes.

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store your preferences or your user name and password so that you do not need to input these details every time you visit the Site;

customise elements of the layout and/or content of the pages of Site for you;

record activity on our Sites so that we understand how you use our Sites enabling us to better tailor our content, services and marketing to your needs;

collect statistical information about how you use the Site so that we can improve the Site; and

gather information about the pages on the Site that you visit, and other information about other websites that you visit, so as to place you in a “market segment”. This information is only collected by reference to the IP address that you are using, but does include information about the county and city you are in, together with the name of your internet service provider.

Most web browsers automatically accept cookies but, if you prefer, you can change your browser to prevent that, or to notify you each time a cookie is set. You can also learn more about cookies in general by visiting www.allaboutcookies.org which includes additional useful information on cookies and how to block cookies using different types of browser. Please note however, that by blocking, deleting or turning off cookies used on the Site you may not be able to take full advantage of the Site.

6. E-mail tracking

E-mail tracking is a method for monitoring the e-mail delivery to those subscribers who have opted-in to receive marketing e-mails from GTR, including GTR Africa, GTR Asia, GTR Americas, GTR Europe, GTR Mena, GTR eNews, Third party e-mails and GTR Ventures.

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So that we can better understand our users’ needs, we track responses, subscription behaviour and engagement to our e-mails – for example, to see which links are the most popular in newsletters. They enable us to understand the consumers journey through metrics including open rate, click-through rate, bounces and unsubscribes. Any other purposes for which Exporta Publishing & Events Ltd wishes to use your personal data will be notified to you and your personal data will not be used for any such purpose without obtaining your prior consent.

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Indicating at the point on the relevant Site where personal data is collected

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To turn cookies and similar technologies on and off, see the information in paragraph 5 above.
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8. Disclosures

Information collected at one Site may be shared between Exporta Publishing & Events Ltd and other group companies for the purposes listed above.

We may transfer, sell or assign any of the information described in this policy to third parties as a result of a sale, merger, consolidation, change of control, transfer of assets or reorganisation of our business.

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Some of our Sites may have a message board, blogs or other facilities for user generated content available and users can participate in these facilities. Any information that is disclosed in these areas becomes public information and you should always be careful when deciding to disclose your personal information.

10. Data outside the EEA

Services on the Internet are accessible globally so collection and transmission of personal data is not always limited to one country. Exporta Publishing & Events Ltd may transfer your personal data, for the above-listed purposes to other third parties, which may be located outside the European Economic Area and/or with a different level of personal data protection. However, when conducting transfers, we take all necessary steps to ensure that your data is treated reasonably, securely and in accordance with this Privacy Statement.

Who has access to your information?

Confidentiality and Security of Your Personal Data

We are committed to keeping the data you provide us secure and will take reasonable precautions to protect your personal data from loss, misuse or alteration.

However, the transmission of information via the internet is not completely secure. Although we will do our best to protect your personal data, we cannot guarantee the security of your data transmitted to our Site; any transmission is at your own risk. Once we have received your information, we will use strict procedures and security features described above to try to prevent unauthorised access.

We have implemented information security policies, rules and technical measures to protect the personal data that we have under our control from:

unauthorised access

improper use or disclosure

unauthorised modification

unlawful destruction or accidental loss

All our employees, contractors and data processors (i.e. those who process your personal data on our behalf, for the purposes listed above), who have access to, and are associated with the processing of your personal data, are obliged to keep the information confidential and not use it for any other purpose than to carry out the services they are performing for us.

Responsibilities

Everyone who works for or with Exporta Publishing & Events Ltd has some responsibility for ensuring data is collected, stored and handled appropriately. Each team handling personal data must ensure that it is handled and processed in line with this policy and data protection principles. However, the following people have key areas of responsibility.
The board of directors is ultimately responsible for ensuring that Exporta Publishing & Events Ltd meets its legal obligations.

Name of Data Controller

The Data Controller is Exporta Publishing & Events Ltd. Exporta Publishing & Events Ltd is subject to the UK Data Protection Act 1998 and is registered in the UK with the Information Commissioner`s Office.

How to access, update and erase your personal information

If you wish to know whether we are keeping personal data about you, or if you have an enquiry about our privacy policy or your personal data held by us, in relation to any of the Sites, you can contact the Data Protection Officer via:

Upon request, we will provide you with a readable copy of the personal data which we keep about you. We may require proof of your identity and may charge a small fee (not exceeding the statutory maximum fee that can be charged) to cover administration and postage.

Exporta Publishing & Events Ltd allows you to challenge the data that we hold about you and, where appropriate in accordance with applicable laws, you may have your personal information:

erased

rectified or amended

completed

Disclosing data for other reasons

In certain circumstances, the Data Protection Act allows personal data to be disclosed to law enforcement agencies without the consent of the data subject. Under these circumstances, Exporta Publishing & Events Ltd, will disclose requested data. However, the Data Controller will ensure the request is legitimate, seeking assistance from the board and from the company’s legal advisors where necessary.

Changes to this Privacy Statement

We will occasionally update this Privacy Statement to reflect new legislation or industry practice, group company changes and customer feedback. We encourage you to review this Privacy Statement periodically to be informed of how we are protecting your personal data.

Providing information

Exporta Publishing & Events Ltd aims to ensure that individuals are aware that their data is being processed, and that they understand.

How the data is being used

How to exercise their rights

To this end, the company has a privacy statement, setting out how data relating to individuals is used by the company. This is available on request and available on the company’s website.

Review of this policy

We keep this Policy under regular review. This Privacy Statement was last updated in April 2018.